UK households face new 'death duty' and being stung with £65,000 bill from HMRC

Labour could introduce a "death duty" for UK households from October in a cruel blow amid the Cost of Living crisis. As the government frantically attempts to plug a £22 billion black hole left by the Conservative Party, inheritance tax could be targeted.

One expert McPhail said a death tax raid on pensions was a “real risk” under Labour. Analysis shows that families inheriting a £100,000 pension – roughly the size of the average pension pot for a 55 to 64 year old – could be stung with a £65,000 tax bill if inheritance tax was applied.

Tom McPhail, of financial consultancy The Lang Cat, said the move would cause a “big disruption” for wealthier pensioners. He added: “The tax treatment of pension death benefits is very generous at the moment. There’s a reasonable possibility [Labour applying IHT to pensions] will happen.

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“At the moment people are using pension funds to make plans for their dependents. But if IHT and the avoidance of it is a concern, then people will have to restructure their retirement plans. Investors will be faced with a decision as to whether to try to preempt any move by Labour. If it looks like it’s coming, we might see people pulling out money from pension funds.”

Tom Selby, of broker AJ Bell, said politicians would be extremely nervous about implementing a policy that would inevitably be portrayed as a “death tax”. He added: “However, it is true that changes made by former chancellor George Osborne in April 2015 mean pensions are extremely tax efficient on death and can – in some circumstances – be passed on completely tax-free.

“It is entirely possible, but not inevitable, that a future government will view this as overly generous and look to raise cash by increasing the amount of tax applied to pensions on death. Were this to happen, the Government would need to consider exactly how to deal with people who have taken decisions about contributing to a pension or transferring a pension based on the tax rules today.”